Commonwealth Bank: How a Government Bank Became Australia’s Most Valuable Company

CBA is the most valuable listed company in Australia and one of the most expensive banks in the developed world. Understanding why requires separating two different arguments that constantly get conflated: whether it is an excellent business, and whether it is a sensible investment at the price. The first is not seriously contested. The second is one of the longest-running debates on the ASX. This article covers how the bank was built, how it actually makes money, and where the risks sit.

How did a government bank become Australia’s biggest company?

The Commonwealth Bank of Australia was established by federal legislation in 1911 and opened for business in 1912, initially conducting both savings and general banking with a government guarantee behind it. For decades it also performed central banking functions, until those were formally separated into the Reserve Bank of Australia in 1959.

Privatisation came in three tranches between 1991 and 1996, ending with the Commonwealth fully exiting its shareholding. That timing mattered enormously: CBA entered the private sector just as Australian household debt began a three-decade expansion, carrying with it the largest retail deposit base and branch network in the country.

The acquisition of the State Bank of Victoria in 1990 and, far more significantly, Bankwest in 2008 during the global financial crisis, entrenched that scale. The Bankwest purchase — bought from a distressed HBOS for a fraction of book value — is one of the better-timed acquisitions in Australian corporate history.

What actually drives CBA’s earnings?

Net interest income, which is the difference between what CBA earns on loans and pays on deposits, multiplied across a balance sheet measured in the hundreds of billions. In FY2025 net interest income rose 5%, driven by a 9 basis point improvement in net interest margin to 2.08% and around A$9 billion of growth in average interest-earning assets.

Two structural advantages produce that margin. The first is deposit funding: CBA holds the largest pool of everyday transaction accounts in Australia, much of it paying little or no interest, which is the cheapest funding a bank can have. Chief executive Matt Comyn has been explicit that the bank is predominantly deposit-funded and intends to stay that way.

The second is asset mix. Australian residential mortgages carry low regulatory risk weights and, historically, very low loss rates, because full-recourse lending and a strong labour market have kept defaults rare even through severe rate cycles. A bank that funds low-risk-weight assets with cheap deposits generates high returns on regulatory capital almost mechanically — which is exactly what a 13.7% return on equity on a 12.3% CET1 ratio represents.

Why is technology spend the real competitive moat?

Because in a market where four banks sell near-identical products at near-identical prices, the differentiator is cost-to-serve and customer engagement. CBA has spent heavily and consistently on its digital platform, and the CommBank app has become the primary channel through which most of its customers interact with the bank.

The spending is substantial and increasingly directed at fraud and scams — more than A$800 million in 2024 and hundreds of millions more in the following year, with the bank reporting a sharp reduction in customer scam losses as a result. That is defensive investment, but in retail banking, trust is the product.

The strategic payoff is data. A bank that sees the transaction flows of a quarter of the country can price risk, target offers and detect fraud better than one that sees a smaller sample. It is also participating in infrastructure-level projects such as Project Acacia, the Reserve Bank-led work on tokenised assets and digital money in wholesale markets, which is where the next generation of settlement infrastructure will be built.

Is CBA overvalued?

That has been the consensus criticism for years, and the stock has consistently defeated it. CBA has traded around four times book value and roughly 28 times forward earnings — levels described by analysts as more than three standard deviations above its historical average, and multiples that would be extraordinary for any bank anywhere.

The bull case rests on scarcity rather than growth. Australian superannuation funds have a mandated, ever-growing pool of capital and a limited universe of large, liquid, fully franked domestic dividend payers. Index-tracking and franking-credit demand create structural buying that is largely insensitive to valuation. The bear case is simpler: earnings growth of roughly 4% a year does not justify a growth multiple, and any re-rating downwards would be severe.

The FY2025 reaction illustrated the tension. Cash profit came in on consensus at A$10.3 billion, and the shares fell over 5% on the day — punished not for a bad result but for the absence of an upgrade. When a stock is priced for perfection, meeting expectations becomes a negative event.

How did CBA handle its regulatory failures?

Badly at first, then thoroughly. In 2018 the bank agreed to a A$700 million civil penalty over breaches of anti-money-laundering and counter-terrorism financing law, largely relating to failures in reporting cash deposits through its intelligent deposit machines. It was the largest civil penalty in Australian corporate history at the time.

APRA followed with a prudential inquiry that produced an unusually blunt report on culture and governance, finding complacency bred by long-run financial success, and imposed an additional A$1 billion capital requirement until remediation was complete. That report became the template for how Australian regulators assess non-financial risk.

The response was structural. CBA sold or exited most of its wealth management and insurance businesses, including its stake in Colonial First State, and refocused entirely on banking. The remediation programme reshaped risk governance across the group. Anyone studying how a large institution recovers from a conduct failure should read the APRA report alongside the Hayne Royal Commission findings that followed.

What does the first half of FY2026 tell us?

That the machine is still working, but the margin story is getting harder. Cash net profit after tax for the half year to December 2025 was A$5,445 million, up 6% on both the prior first half and the prior second half, with pre-provision profit of A$8,131 million. Volume growth in home and business lending carried the result.

The pressure point is deposit competition. Every major bank is competing for household deposits to reduce reliance on wholesale funding, and that competition compresses the deposit margin that underpins the entire model. CBA’s CET1 ratio of around 11.6% still sits comfortably above requirements, giving the balance sheet capacity to keep lending through a slower cycle.

The macro backdrop has also turned. After the Reserve Bank cut through 2025, the cash rate rose again through 2026 to 4.35% by May. Rising rates are a mixed blessing for banks: they lift the return on the deposit book but raise borrower stress and eventually slow credit growth. Our breakdown of Australian mortgage economics explains the mechanics in detail.

What can other businesses learn from CBA?

Three things. First, cheap, sticky funding is worth more than clever products. CBA’s entire advantage traces back to being the bank where most Australians keep their everyday transaction account, which is a distribution and habit advantage rather than a financial one.

Second, that being the largest domestic player in a concentrated, regulated market produces exceptional returns until a regulator decides it does not. The A$700 million penalty and the A$1 billion capital overlay were the price of assuming that financial performance would substitute for cultural discipline.

Third, that scale in technology is now the main lever available in a mature industry. CBA cannot grow its market much faster than Australian nominal GDP; it can only take share, reduce cost-to-serve and retain customers. Every strategic dollar the bank spends now flows toward one of those three objectives, which is a useful template for any incumbent operating in a saturated market. For a very different Australian financial services model, see our profile of Macquarie Group.

How does CBA compare with global banking peers?

Favourably on returns and unfavourably on price. A 13.7% return on equity is strong for a developed-market retail bank in a low-growth economy, and it is achieved while holding more capital than most European or North American peers. Australian majors were required to reach an “unquestionably strong” capital benchmark after the 2014 Financial System Inquiry, and they have held it since.

The difference is business mix. Large US and European banks carry investment banking, trading and international operations that produce higher volatility and lower average returns. CBA does almost none of that. It is a domestic deposit-and-mortgage business with a payments franchise attached, which is a structurally higher-return, lower-volatility model as long as the domestic economy holds up.

That is also the case against it. A bank with no meaningful geographic or business diversification is a leveraged bet on one country’s housing market and labour market. International investors have consistently been unwilling to pay Australian multiples for that concentration, which is why the marginal buyer of CBA shares is almost always domestic.

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